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US Q1/16 GDP growth revised marginally higher

May 27, 2016

    • Despite the upward revision, the first-quarter 2016 increase still represented a slowing from the already modest 1.4% increase recorded in the fourth quarter of 2015.
    • Market expectations had been for a marginally stronger 0.9% increase.
    • The upward revision to growth largely reflected greater contributions to growth of 0.1 percentage points from three main areas: net exports, residential investment, and inventories.
    • Some offset was provided by marginally weaker business investment.

Despite the upward revision, growth in the first quarter of 2016 remained disappointingly below the economy’s long-run potential or average rate. The quarter indicated some areas of impressive strength with residential investment growth of 17.2%, which represented an upward revision from the previously estimated 14.9%. Consumer spending continued to rise, albeit at a relatively modest and unrevised pace of 1.9%. The decline in exports was lessened to 2.0% from -2.6% previously. Imports are now estimated to have declined by 0.2% compared to the previously estimated 0.2% increase. The build in inventories still slowed in the first quarter although not to the same extent as previously estimated, with the subtraction from overall gross domestic product (GDP) growth being lessened to -0.2 percentage points from -0.3 percentage points previously. The inventory component has now subtracted from growth for three consecutive quarters. A main source of weakness was business investment dropping by 6.2%, which represented a slight downward revision from the previously estimated -5.8%.

Some initial data for the second quarter, such as the strong April retail sales report, provided optimism that the slowing trend is not continuing in the current quarter. Optimism about strengthening consumer spending was additionally provided in the report, with the first-quarter savings rate being revised upward sharply to 5.7% from the previously estimated 5.2%. Our forecast projects an annualized second-quarter 2016 GDP increase of 2.9%. We expect that indications of above-potential growth being sustained will return the Fed to tightening mode by the fourth quarter of 2016.

Paul Ferley, Assistant Chief Economist, RBC Economics